In “Tax Considerations in a Universal Pension
System (UPS),” authors Adam Carasso and Jonathan Barry
Forman say a universal pension system may be warranted
due to the inadequacy of the current U.S. public and
private pension systems, and the escalating costs of
health care. The paper indicates individual accounts
established with 3% payroll contributions could help
guarantee every worker has an adequate retirement
income.

Specifically, the system proposed by the authors
results in a replacement of 14.4% of final wages for all
men retiring at age 65, 13.3% of final wages for women
(longer life expectancies mean lower monthly annuities),
14.4% for one-earner couples, and 13.8% for two-earner
couples, according to a summary of the paper.

The authors admit that while the payroll deductions
would have positive tax consequences for most workers, at
distribution most of the tax advantages of their system
would be realized by the upper-middle class and above.
Additionally, the authors concede that any universal
pension system will be costly to the Treasury.

The authors suggest a pension system that would cover
all workers – full-time and part-time – and require them to
contribute at a level that can help provide them with
adequate incomes when they retire. The simplest design for
such a system, the paper says, would be to piggyback
individual retirement savings accounts onto the existing
Social Security system. Other designs would target
subsidies to low-income workers to help defray the costs of
such a new system on their incomes.

This paper develops such a universal pension system
and estimates its revenue and distributional
consequences. The authors say the accounts could be held
by the government; invested in a broadly diversified
portfolio of stocks, bonds, and government notes; and
annuitized on retirement.

Provided that action is taken to restore solvency
to the Social Security system, the authors claim the
universal system they describe would raise the total
replacement rate for average wage men to 49% – or 39.8%
if Social Security is not modified.